Why Can't IMAX Fade to Black?

If you think that the screens are big at IMAX (Nasdaq: IMAX), just wait until you see the deficits.

OK, so that's not much of a selling point. Then again, when your third-quarter loss from continuing operations widens to $0.19 a share from $0.12 a share, you may as well dig into that popcorn tub as you take in the grandiose.

Like your sums in smaller steps? Feel free to bemoan the 4% drop in revenue to $29.8 million.

A lot of factors are at play here, pulling IMAX's financials in different directions. On the tug down, the company recognized revenue on just five new large-screen system installations during the period. It signed deals for 18 new screens during the quarter, and that's great for the backlog of orders, but it won't help IMAX now. Gross margins deteriorated sharply there, too.

That was partly offset by healthy gains elsewhere, especially an 84% boost in its revenue related to porting Hollywood flicks into IMAX experiences. That's where the gravy is for IMAX, especially now that new installations to third parties are either drying up or becoming part of joint ventures with multiplex operators like Regal (NYSE: RGC) and AMC -- which has filed to go public.

IMAX has teamed up with Sony (NYSE: SNE), Viacom's (NYSE: VIA) Paramount, and Time Warner (NYSE: TWX) to give their high-profile releases incremental exposure in recent years. It's become a major part of movie studio strategy, especially as the total number of available IMAX screens grows. For instance, in the third quarter, Time Warner's latest installment in the Harry Potter series generated $37.8 million in box-office receipts for the exhibitors playing the enhanced IMAX version on 142 different screens. That was more than the previous two Potter flicks combined generated at the IMAX box office.

These are interesting times at the corner multiplex, even beyond the buzz generated by recent IPOs from Cinemark (NYSE: CNK) and National CineMedia (Nasdaq: NCMI). Chains are slowly migrating to digital projection systems, providing greater programming flexibility. With the ability to deliver rich, three-dimensional experiences, IMAX is fighting back with its own digital platform. The company is ahead of schedule on that front, with the first systems rolling out by June. 

That is important because the company has signed revenue-sharing agreements with nine multiplex operators. IMAX needs to cement its status as the premium movie house experience before exhibitors settle for smaller-scale solutions.

Unfortunately, you have to spend money to make money in joint ventures that involve costly system installations. With just $18.2 million in greenbacks, IMAX is its own worst enemy in ramping up its presence.

So forget about big deficits, big screens, or even big accounting problems that have been finally put to rest. What IMAX needs now is a big buyout.

Now that would be a feature presentation worth watching.

Screen these other IMAX articles:

• IMAX had a mixed quarterly report in August.
• It began 2007 with a laundry list of challenges.
• Beyond outright system sales, IMAX is a multiplex darling with its joint venture deals.